By Owen Halberg
For more than a decade, the global economy ran on money so cheap it felt almost free. From the aftermath of the 2008 financial crisis through the pandemic years, near-zero interest rates and central bank asset purchases fueled an unprecedented era of borrowing. Governments financed stimulus packages without immediate pain, corporations refinanced at bargain rates, and households locked in historically low mortgages.
That era is over. And the transition will be neither smooth nor evenly felt.
From Relief to Reckoning
The return of sustained inflation forced central banks to hike interest rates at a pace unseen in forty years. For sovereign borrowers, that means refinancing costs are climbing sharply just as pandemic-era debt comes due. For heavily leveraged corporations, it means the cushion between operating income and interest expense is thinning—fast.
Even households that locked in low rates are not immune: tighter credit conditions ripple through job markets, equity values, and consumer confidence. The cheap-debt tide lifted all boats; its retreat will expose who has been navigating without a keel.
The Sovereign Stress Test
Emerging markets face the most acute pressure. Many borrowed in dollars when U.S. rates were near zero; now, they must repay in a currency that has strengthened and at interest rates that have surged. The IMF’s debt sustainability assessments are beginning to flash red across parts of Africa, Asia, and Latin America.
Developed nations are not immune, either. Japan, Italy, and the U.S. carry debt-to-GDP ratios that make them sensitive to even small rate increases. The question is not whether borrowing costs will bite—it’s when.
Corporate Balance Sheets Under the Microscope
The past decade encouraged riskier capital structures. Private equity firms, in particular, thrived on cheap leverage, paying high multiples for acquisitions in the belief that low rates were here to stay. Refinancing that debt in today’s environment means either absorbing higher costs, cutting investment, or—more likely—passing on price increases to consumers.
Highly indebted sectors like commercial real estate are already showing cracks, especially in office markets hollowed out by hybrid work.
Policy in a Post-Cheap-Debt World
For central banks, the challenge will be balancing inflation control with financial stability. For governments, the calculus shifts from “How much can we borrow?” to “What is politically and economically sustainable?” Infrastructure projects, social programs, and defense spending will all face sharper trade-offs.
At the global level, institutions like the IMF and World Bank will play a more prominent role in managing debt distress, but their conditionality will revive debates about sovereignty and austerity.
The New Normal
Cheap debt was an accelerant—it sped up growth, investment, and asset prices, but also encouraged complacency. The next phase will demand a return to fundamentals: disciplined fiscal policy, careful capital allocation, and more realistic return expectations.
The era of free money is gone. The countries, companies, and households that thrive from here will be those that remember an old truth cheap debt made easy to forget: leverage works both ways.
